Comment: Cautious optimism as US and China declare trade war truce

The world’s financial markets have been cheered this week by the adoption of a more conciliatory tone in trade negotiations between the US and China. David Cottle considers what this means for investors, and how they should respond.

Signs of a thaw have given equity some additional pep around the world and caused some divergence in the strong dollar foreign exchange trading of the last two months.

The dollar continues to gain against the euro and sterling, with political risks evident around Brexit and Italian politics. However, the Australian and New Zealand dollars have risen against the greenback, at least partially thanks to perceptions of reduced trade tensions.

It will probably still pay investors to greet this ostensibly good news cautiously. A more constructive tone to the debate is undoubtedly to be welcomed after the hostile exchanges we heard earlier in the year.

Short on detail
That said markets remain very short of any tangible details about a future China-US trade relationship and, with the status quo clearly not an option for the Trump Administration, those will have to come at some point. A deal won’t be easily struck, if it is struck at all, and investors should have no illusions about this.

China is already aiming at a relatively modest growth target this year and, if it is to meet it, won’t want to seriously reduce its export business even if it is less dependent on that for growth than it used to be.

Moreover, trade stories are unlikely to hold market attention for very long unless they offer something substantive.

It’s likely that this week’s quite lengthy list of US Federal Reserve speakers, and the release of its last set of monetary policy minutes, will put market focus back on the inescapable fact that the Fed is the only major central bank meaningfully tightening monetary policy.

This is in turn likely to see the trend towards a stronger greenback resume, and Aussie and Kiwi dollar investors should probably hedge bullish bets cautiously- both currencies conspicuously lack interest-rate support.

Investors in just about anything will need to keep a close eye out for trade headlines, but these are of course all-but impossible to predict. Official trade data can also offer valuable cues, even if they tend to be a bit historic by the time of release.

David Cottle is an analyst at financial markets news and analysis site DailyFX

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